Goldman Sachs: US stocks' rise next year will be focused on the second half, and technology giants are expected to continue to outperform.

Goldman Sachs' stock team called Taylor Swift's "Eras" tour one of the most notable cultural events of 2023 and drew inspiration from her songs to look ahead to 2024. Goldman Sachs strategist David Kostin wrote in a report on Wednesday, "This time next year, portfolio managers will look back and realize the best investment strategy for 2024 was to take advice from Taylor Swift's song 'Stay' from the album '1989': 'All you had to do was stay'invest." Kostin expects the S&P 500 index to end next year with a below-trend increase at 4,700 points, a gain of about 5%, slightly lower than the historical high of 4,797 points. Kostin said, "Our S&P 500 index targets for the next 3 months (4,500 points) and 6 months (4,500 points) reflect a flat market for the first half of 2024. We believe the index's returns will be concentrated in the second half of 2024." He added, "Strong economic growth early next year will force the market to delay current pricing, i.e., the Fed lowering rates will start in the second quarter, and uncertainty over the US presidential election will suppress risk appetite. Later next year, the Fed's first rate cut and the elimination of uncertainty from the election will boost the US stock market." Kostin pointed out three factors that will limit stock appreciation next year. Goldman Sachs' forecast of 2.1% GDP growth in 2024 is reflected in stock prices. With weakening profitability, profit margins are unlikely to increase significantly. The impact of generative AI on profits in the short term is limited. "Based on historical absolute and relative valuations, the S&P 500 index's forward P/E ratio is 19 times, which is fair value, but is unlikely to increase significantly in 2024." Regarding the team's forecast for 2023, the strategist said they were correct in their earnings forecast but wrong in their market return forecast. He said, "We correctly predicted that overall earnings for the S&P 500 index would not increase. We originally forecasted earnings per share of $224, and 10 and a half months into the year, the market is on track to achieve earnings in line with that figure. Equal-weighted earnings per share for the S&P 500 index also remain level. However, we were wrong because while the equal-weighted index has seen little appreciation to date, the total return of the composite index is 19%, with a few mega-cap stocks having very high returns." Kostin said, "Strong realized sales growth, upward revisions, association with the artificial intelligence theme, and valuation increases explain this modest gain. The fabulous seven giants (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla) currently account for 29% of the total market cap of the S&P 500 index and have a cumulative return of 71% to date. The remaining 493 stocks in the index have a return of only 6%." Kostin noted, "Our benchmark forecasts suggest that large-cap tech stocks will continue to outperform other constituents of the S&P 500 index in 2024, but given the upward revisions, the risk/reward profile of this trade is not particularly attractive. These 7 stocks have faster expected sales growth (11% vs 3%) for 2023-2025, higher profit margins for 2023 (22% vs 10%), and higher reinvestment rates (61% vs 18%) compared to the other 493 stocks. Considering the expected growth (relative PEG ratio of 0.9x), their relative valuations are consistent with recent average levels. However, given the higher expectations, the risk/reward of this trade is not particularly appealing. The increase in hedge fund holdings and the potential shift in enthusiasm for artificial intelligence are two risks that large-cap tech stocks face."